The Impact of a Change in Interest Rates
Is now a good time to switch or fix your mortgage?
This week we’ve heard the announcement of a hold, for the second time in a row, of the Bank of England base rate.
One of the most significant factors affecting the cost of homeownership is the prevailing interest rate. Mortgage rates play a pivotal role in determining affordability and any change in Bank of England base rate can have a substantial impact on both borrowers and the housing market as a whole.
It’s important to note that if you’re on a fixed rate deal - it’s likely you’ll not be seeing any changes to your payments in the short term, however, for those outside of their fixed deal (on the Standard Variable Rate - SVR, or even a base rate tracker) - a cheaper option may now be available.
The good news is that in the last few months, interest rates have (on the whole) stabilised as lenders have become comfortable with both the economic and political landscape; as a result the mortgage market has been less volatile.
For those questioning what all this means, here’s a quick dive into the consequences of a change in interest rates, exploring both the effects of a rise and a fall for you.
Rising Interest Rates
When the Bank of England base rate increases, the immediate effect on borrowers could be higher monthly payments. If you already have a fixed-rate mortgage, your existing rate and monthly payment remains unchanged. However, if you're shopping for a new mortgage, have a variable/tracker rate mortgage or you are on the ‘Standard Variable Rate - SVR’, you'll feel the pinch. The increase in rates may render some homes less affordable, which can slow down the property market as the amount people can borrow may be reduced.
Furthermore, a market which is experiencing base rate increases can lead to home values maintaining or decreasing slightly. As mortgages become more expensive to service, the confidence in the market typically declines, causing sellers to reduce prices in a bid to secure a buyer. Rising interest rates can also impact refinancing options, leading to some clients extending their term, paying more off their mortgage from savings or family assistance or even selling their homes.
Falling Interest Rates
Conversely, when interest rates decrease, borrowers can benefit in several ways. Monthly mortgage payments for new buyers or those refinancing existing loans become more affordable, allowing more people to enter the housing market or lower their financial burden. This increased affordability can boost home sales and, in turn, elevate property values.
For existing homeowners, a decline in interest rates can create opportunities for refinancing, potentially lowering monthly payments and saving on interest over the life of the loan. This additional disposable income can stimulate consumer spending and the overall economy.
In conclusion, fluctuations in interest rates have a substantial impact on the housing market and homeowners. A rise in rates can increase the cost of homeownership and slow down the property market, while a fall in rates can improve affordability, increase property values, and create financial opportunities for both new buyers and existing homeowners. Understanding these dynamics is crucial for anyone navigating the complex world of mortgages and property; we advise speaking with a qualified, reputable mortgage adviser.